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Digital Transformation – Part V: Blockchain May Be the Future of IT

Morning Star is not your usual company. That’s because the 400-person California-based agribusiness has no supervisors. Rather than relying on the intelligence of an elite few, Morning Star is a highly successful self-managing peer-to-peer network that has skillfully leveraged the “power of many” to sustain its position as the world’s largest tomato processor.

From the beginning, the company’s founder, Chris Rufer, built his innovative enterprise on two core principles. First, individuals should keep their commitments to others. People at Morning Star are not handed assignments. Instead they negotiate Colleague Letters of Understanding with their co-workers, and, to assure everyone is honoring their commitments, the metrics associated with these agreements are published bi-weekly.

The second principle is that no individual should use force against others or their property. This means that no single person has the authority to issue an order or the ability to unilaterally fire another person. For the people at Morning Star, what they do and with whom they work are always collective decisions.

For over three decades, these two principles have served as a solid foundation to support an innovative management technology that is disrupting the way we build and lead human organizations.

Recently, there has been increasing buzz about another innovative technology—this time in the financial services world—that many believe has the potential to disrupt the way we build and organize IT systems. This technology is blockchain. Like Morning Star, blockchain is designed as a peer-to-peer network which, upon close examination, also follows Rufer’s two core principles.

Blockchain

Blockchain is the creation of an anonymous individual or group of individuals who, using the pseudonym Satoshi Nakamoto, published a short paper in 2009 that outlined an unconventional peer-to-peer system that allows users to directly transact business without the need for any intermediaries.

Blockchain is a distributed ledger system that uses a network consensus to record and execute transactions. It’s best known as the platform for the Web currency Bitcoin. Blockchain’s most distinguishing characteristic is that no single agent has the ability to execute control over system activity. Or to use Rufer’s words, no individual can engage in coercive activity against another person or their property.

To understand how blockchain works, consider this analogy—which while admittedly simplified—conveys the basic sense of this paradigm shift in systems architecture. Imagine you are attending an auction, along with 300 other people, to bid on the numerous treasures and heirlooms from the estate of a recently departed collector. Let’s also imagine that the 300 auction participants are a blockchain community. As the auction proceeds, there is a particular painting that you would like to bid on, but you can’t afford to spend more than $2,000. As the bidding proceeds, you find yourself in a competition with another participant who bids the painting up to $2,500 and wins the bid.

Because the auction is using blockchain, recording this transaction requires the majority of the 300 people in the room to agree that the particular painting was sold for $2,500 to the competing bidder and to affirm he has the cash to pay for the painting. Once consensus is reached, the transaction is grouped and recorded with other bidding transactions into a block, which is permanently timestamped and connected into a chain with other blocks of transactions from the auction, hence the name blockchain.

When a block is connected to the chain, it is immutable and can never be altered. In addition, these blocks are not recorded in a single central ledger, but rather into a distributed ledger, which means that all of the participants have their own individual copies of the ledger. This makes it difficult for a single individual to commit fraud because all copies of the ledger would need to be changed to pull off the counterfeit transaction. As Jaron Lanier, the author of Who Owns the Future?, succinctly puts it, “You can fake an ID, but you can’t fake a thousand concurrent views of the person you are falsely pretending to be.”

Any modification to a transaction has to be recorded as a separate immutable entry in a new block that references the timestamped original transaction. This means that, if after the event, the winning bidder, who also happens to be the brother-in-law of the auctioneer, tries to persuade the auctioneer to accept a lessor amount for the painting and change the recorded transaction because “we’re family,” the auctioneer would be unable to do so because adjusting the record would require a completely new transaction that would need to be agreed upon by the blockchain community. Obviously, the majority of the auction participants are not going to affirm a false entry.

Extinguishing the “Power of One”

This game-changing systems architecture is likely to revolutionize the way we build IT systems because it has the potential to eradicate most hacking and fraud activity and would provide a solid solution for the first big job to be done that we discussed in Part IV of this series: to transition all IT systems to a new platform that completely extinguishes the “power of one.”

The problem with our current IT structure is that by keeping data in centralized systems, once a system is breached, a hacker has complete access to all the information and is free to use his or her “power of one” to singularly execute actions that can wreak havoc on unsuspecting victims. This ability is lost in blockchain because hackers will be powerless to influence the “power of many” who will not be inclined to go along with illicit actions.

Smart Contracts

Another innovative characteristic of blockchain is that it has the capacity to create what are known as “smart contracts.” In typical business arrangements, expectations and agreements between parties are usually memorialized in written contracts, with the understanding that each of the parties can trust the others to act according to the terms of the contract. If that trust is breached, the parties have the option to sue each other in legal proceedings, which are often prolonged and costly. Smart contracts eliminate the possibility of breaches by transforming the foundation of trust from reliance upon the good intentions of others to credence on a basic attribute of the blockchain system.

With smart contracts, agreements and expectations are built into the system, making it difficult, if not impossible, for one party to violate the terms of a contract. Thus, any time there is a transaction, recording it on blockchain requires an affirmation that the action is consistent with the terms of the smart contract. In other words, Rufer’s principle that individuals should keep their agreements with others is a core pillar of the basic architecture of blockchain systems.

Creating a New Economic Engine

Blockchain also provides a foundation for solving the second big job to be done referenced in last month’s blog: to create a new economic engine to preserve the middle class as the number of jobs are dramatically reduced. As mentioned above, blockchain is the architecture used for the cryptocurrency in Bitcoin. This means that blockchain has the capacity to calculate value. At this time, the mathematical dynamics for calculating cryptocurrency are relatively basic. However, as the evolution of the Internet of Things (IoT), the emergence of artificial intelligence, and the phenomenon known as Moore’s Law continue to accelerate the technology revolution, there is a strong possibility that blockchain systems architecture will develop the capability to create sophisticated algorithms that can accurately calculate the economic value that people contribute by their participation in network activity. This value is likely to take the form of a cryptocurrency that will be valid tender in specific economic markets.

If you are wondering how this form of currency might work, let’s look at an early precursor of this type of value creation with which we are all familiar: frequent traveler points. Frequent traveler points are a form of currency that have real economic value in specific markets. In addition to booking flights and hotel rooms, these points can be used for a wide range of approved retail purchases from dedicated catalogues. Similarly, once algorithms have the wherewithal to calculate the relative value of our participation on social media sites or our contributions to the quality of Wikipedia articles or Google searches, we can be fairly compensated in cryptocurrency for our activity in these new economic platforms. When we have this capability, the pervasive problem of the inherent wealth inequality in the current structure of the Internet will begin to resolve itself as more people have a vehicle for wealth creation in a digitally transformed economy.

While blockchain is clearly in its infancy and has many bugs to be worked out and applications to be developed, the network-based architecture of this innovative technology promises to go a long way in making sure the benefits of digital transformation significantly outweigh the dangers and that these benefits are shared by all as we continue to discover new ways to create wealth.

Rod has more than 30 years of experience in management positions of increasing responsibility in the healthcare industry. Rod is an innovative executive leader with sustained success in achieving financial, operational, and market growth objectives in challenging environments. He has extensive experience in serving as a catalyst for positive change and in building highly collaborative organizations.